Commercial loans for retail properties.

Retail Properties

Best Rates are associated with: Properties with >1.25 DSCR, <75% LTV, <8% vacancy, appropriate TI/LC, Cap Ex reserves; spreads are typically higher for unanchored retail

Issues:

High credit, national chains and build to suit properties have been very competitive in the marketplace

Tenant diversification continues to be scrutinized

Non-credit single-tenant properties are under close watch

Spreads are typically lower for properties exhibiting a stabilized Trailing 24-36 Month Net Cash Flow

Net Cash Flow calculations include Replacement Reserves

Lenders may reconcile property value using the Direct Capitalization Approach on NOI and NCF

General Required Calculations:

Rent Roll illustrating in-place occupancy and Potential Gross Income

Effective Gross Income - Potential Gross Income minus the greater of underwritten or market vacancy

Net Operating Income - EGI minus operating expenses

Net Cash Flow - NOI minus Tenant Improvements & Leasing Commissions and Capital Expenditures

Debt Service Coverage Ratio - NOI divided by Annual Debt Service

Cap Rate - should be applied to the stabilized income stream to estimate direct capitalized value to support loan request

Commercial Financing is underwritten on a case by case basis. Every loan application is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages.

Financial Analysis
A key component in making an underwriting evaluation is the debt coverage ratio (DCR). The DCR is defined as the monthly debt compared to the net monthly income of the investment property in question.

Loan to Value
Most commercial lenders will require a minimum of 20% of the purchase price to be paid by the buyer. The remaining 80% can be in the form of a mortgage provided by either a bank or mortgage company.

Credit Worthiness
For businesses less than three years old, personal credit of principals will be evaluated. This may hold true for longer periods of time for tightly held companies. For corporations, business performance and credit ratings will be evaluated with a proven track record.

Property Analysis
Fair Market Value and Fair Market Rent will be analyzed. Special use property may require additional underwriting. Age, appearance, local market, location, and accessibility are some other factors considered.

 

To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the mortgage payment(s). For the sake of simplicity, let us assume that there is only one mortgage on the property:
$500,000 First Mortgage
11% Interest, 30 years amortized
Annual Payment (Debt Service) = $57,139

Then:
DSCR = Net Operating Income (NOI) = $65,000
Total Debt Service $57,139
DSCR = 1.14